October 19, 2010 - After a 25-percent jump in sales last year, the cigar segment is coming on strong again in c-stores, thanks in part to manufacturer innovation and tax-weary cigarette smokers jumping to large filtered cigars.

Background: Last year, Congress increased the excise tax on little cigars, which are filtered and about the same size and shape as cigarettes. Since then, several tobacco companies appear to have slightly increased the weight of the little cigars so they qualify for the lower tax rate that applies to large cigars. According to the federal Alcohol and Tobacco Tax and Trade Bureau, sales of products defined as large cigars have increased fourfold since the tax hike, while sales of little cigars have dropped 79 percent. (Tobacco Cos. Exploiting 'Little' Cigar Loophole?, Join Together, 9/29/2010)

The Convenience Store News 2010 Industry Report showed a significant leap in cigar sales last year, from $14,897 per store in 2008 to $18,567 per store, as retail prices rose with the increase in the federal excise tax, which pushed wholesale prices more than 32 percent. This year, retailers and wholesalers are again reporting strong sales and continued consumer interest in the segment.

The operator's retail cigar sales saw double-digit increases last year and are on mark to do the same in 2010. "Consumers are purchasing both cigarettes and little cigars in the same transaction and switching between the products," Frank Davoli, director of sales and marketing for South Bend, Ind.-based Richmond-Master Distributors Inc. said. "It seems they are taking a 'smoke a cigarette, smoke a cigar' approach as a way to decrease the total cost of tobacco enjoyment."

Although the flavored cigar segment is not enjoying the growth it has in years past, certain flavors still remain vital, agreed Ron Coppel, vice president business development, Eby-Brown Co. who pointed to wine, grape, strawberry and in certain markets, peach flavors as standouts. "Other flavors will surge in certain regions for a brief period, but the resurgence has proven short-lived."Further driving sales: manufacturer innovations, such as the foil pack. Whether in a single, two-stick or buy-some-get-some-free format, foil packs have contributed to the increase in cigar sales, Davoli said. "The packaging screams 'freshness' and the consumer loves a fresh product," he noted.

Marketers have done a good job of convincing customers that foil is fresher -- and fresher is better, said Andrea Myers, executive vice president of marketing for Kocolene Marketing LLC, the Seymour, Ind.-based operator of 12 Fast Max c-stores and 19 Smokers Host tobacco stores. "The younger adult customers are into that trait. It's a little harder to convert the older customers, who just want to come in and buy cigars in a box. But if you can sell them on the freshness aspect, they are willing to change over."

Since the tax increase, Kocolene's stores are experiencing a boost in unit sales, especially singles compared to five-packs or box sales. "Customers don't have the dollars to shell out for the five-pack," Myers said. "Some manufacturers are now offering a two- or three-pack. There are so many deals on single packs, we are seeing a conversion to that."

In the large-cigar segment, a redesign and reclassification of what used to be called "little cigars" to "filtered large cigars" has boosted performance industrywide. Brands such as Cheyenne, Smokers Choice and Santa Fe, all once classified as little cigars, have been reformulated as filtered cigars and continue to impact the segment.

"With filtered cigars coming in a pack just like cigarettes, and taxed lower than cigarettes, many smokers are trading over," Myers said. The least expensive filter large cigars at Fast Max stores retail for 99 cents per pack; the most expensive, Santa Fe, goes for $1.89. Smoker's Choice retails for $1.39. At the same time, the stores' least expensive pack of cigarettes retails for more than $3 and carries a much smaller margin.

Also spurring cigar sales are new players who are introducing products priced 20 percent to 30 percent below the traditional manufacturers' comparable items. "I equate this to the growth of the fourth-tier cigarette category as taxes and retail price went up on the major brands," Davoli said. "I believe that we will continue to see more discount pricing pressure as time goes by."